Two Ways TradeSmith Readers Win
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The rising tide is sinking these small-caps… How TradeSmith’s software makes stock-picking a breeze… Two ways TradeSmith users are profiting right now… The one stock catching up to bitcoin’s 7-year return… The NYSE glitch and the danger of stops… Apple’s breakout AI moment may soon arrive…
It’s rarely been so simultaneously profitable and dangerous to be a small-cap stock picker.
Right now, the rising market tide is lifting some boats far more than others. Yet even as the broad Russell 2000 ETF (IWM) is up a mere 2.4% almost halfway through the year, some small-cap sectors are thriving.
Just look at the 2024 sector performance across the small-cap S&P 600 as well as the large-cap S&P 500 in the chart below. While the small caps have notably fewer gainers, there are several standout winners among them:
Source: FactSet
For large caps, though, the rising tide has already lifted almost all boats. With AI still at the forefront, communication services, information technology, and utilities have taken the bulk of the gains.
Meanwhile, large-cap consumer discretionary stocks are about flat – driven by the growing weaknesses in consumer spending. And large-cap real estate stocks, still grappling with high lending rates, low supply, and the resulting nervous homebuyers, are down more than 4%.
But things really get complex in the small-cap sector:
- Early-stage growth companies in the financials, staples, and real estate sectors are all down for the year.
- Energy, materials, and industrial companies are the place to be.
- Materials and consumer discretionary small-caps, especially, have outpaced their large-cap counterparts.
- Even small-cap real estate stocks have lost less than large-caps.
Even more interesting, some of the top-performing large-cap sectors – comms and IT – are among the worst-performing in the small-cap space.
This tells me that when it comes to tech innovation, investors are heavily favoring the biggest, most established companies. They don’t have much confidence in a smaller player emerging that can compete with the likes of Nvidia (NVDA), Google (GOOG), and Amazon (AMZN) on the current hottest tech trend. And that’s just as true when it comes to big financials and staples companies.
But there are pockets where small-cap stocks are thriving. And as we’ve shown you time and again, the second half of this year is primed for a small-cap-dominant rally.
So what to do?
Go hunting for small caps in the strongest sectors of the year so far.
❖ How should you position now for this small-cap-dominant rally?
The TradeSmith Screener tool gives us some great clues…
Winners tend to keep winning. So when we see a few standout sectors in the small-cap field, especially when they’re rivaling and even surpassing their large-cap peers, we should focus our attention there.
I set up a quick TradeSmith Screener for small-cap stocks in the winning sectors above: materials, consumer discretionary, and energy. I also screened only for stocks with a Business Quality Score greater than 75 and trading in the Green Zone – our proprietary measures of fundamental quality and positive momentum.
Finally, I made sure the stocks had a dividend greater than zero, as high quality and dividend issuance make a great cocktail of factors.
Sorting the results by market cap, here are the five stocks at the top. There are a few interesting names to take a look at, some of which are new to these eyes:
Of course, you should always do your own research. But this list should act as a great starting point for a deep dive.
With the Screener, you can slice and dice the market dozens of ways, screening for any combination of factors you’d like, including the ones above.
Look out for more demos of the Screener tool right here in TradeSmith Daily.
❖ TradeSmith users are making big profits this year, in many different ways…
In the postscript to my weekend column, I asked you about the big profits you’ve made thus far using our tools.
Opening up the inbox Monday morning, I came across more than a few replies well worth sharing. Here’s a note from TradeSmith Platinum members Tim and Adele:
Good Afternoon!
We’ve been Platinum members for a few months now but started out initially with Trade360, I think it was called, a couple years ago. We wish we had pulled the trigger and just did Platinum from the beginning! Hindsight really is 20/20!
We decided to upgrade to Platinum because we really wanted Mike Burnick’s Ultimate Income. We were pretty disappointed when that service would be ending but it did push us into trying more of the tools on our own with more confidence!
We enjoy many of the articles from TradeSmith editors and it has helped us gain a better understanding of not only the stock market but our economy, as well!
Last week I followed Mike B’s suggestion for the buy/write strategy on the energy sector and we pulled in nearly $1,000 in premiums from selling covered calls. One of the stocks did get called away for a profit and we felt confident enough to roll some for more premiums using the Seasonality tool, Ratings & Health Status to guide us! We are getting acquainted with the Harmonic Seasonality Tool and are looking forward to using that more, as well!
Thank you so much for your services! We are gaining knowledge & confidence in investing & trading!
—Tim & Adele, Platinum members
Thanks for writing in, Tim and Adele. And thank you for being Platinum members. I’m glad to hear your investment is already starting to pay off.
Trade360 and Options360 are some of my absolute favorite pieces of TradeSmith software. The former’s Pure Quant Portfolio Builder (which Keith recently demonstrated here) and the Screener, which we showed off above, are the clear highlights.
Options360, too, is an essential tool for anyone looking to trade options as you describe. It helps you screen for opportunities, much like we did earlier for small caps, and find options ideas with high Probabilities of Profit. (Sidebar: if you’re reading this and wondering if you can still get in on Options360, the recent One Percent Event offer closed last night. We’ll let you know if and when it opens again.)
When it comes to Ultimate Income, we understand your disappointment but we’re glad to see you felt confident to use TradeSmith’s tools and keep the income train rolling. As we told readers in our announcement that we’d end the service, Ultimate Income had a lot of crossover with more popular services from Mike Burnick like Constant Cash Flow.
Because of this, we felt it best to consolidate them – leaving Mike open to launch new strategies in the near future that, as Platinum members, you’ll of course get instant access to at no additional charge.
But clearly, the change hasn’t stopped you from raking it in on Mike Burnick’s world-class options recommendations. And you’re not alone. As another reader, Jackie, wrote to us:
I’ve been using Mike Burnick’s Constant Cash Flow since October 2023. Six out of eight months have been significant winners. One of the other two months was only slightly below breakeven. So one losing month out of eight feels pretty good to me.
—Jackie
Thanks for writing in, Jackie. That’s a fantastic result… and shows just how consistent Mike’s income strategies are, especially when backed by TradeSmith’s world-class algorithms.
Here’s another note, from subscriber James, with a simple strategy whose merits are impossible to ignore:
I buy bitcoin every month, and I’ve been doing this for about seven years. Bitcoin has outperformed all the stocks I own, including high-fliers like NVDA, SHOP, etc.
—James
First of all, James, a huge kudos to commit to buying bitcoin every month for seven years. It takes guts to keep buying through the depths of crypto bear markets, with bitcoin retracing more than 50% from its highs and sometimes even lower.
Though clearly, that strategy pays off. It’s hard to find an asset class that has produced greater wealth in such a short time as crypto has. One could even argue it’s impossible. I know that my own bitcoin buys, dating back to 2016, can attest to its long-term success.
Just take this chart of Bitcoin against some of the market’s highest flyers and it’s clear to see:
Some of the best stock performers since 2017 don’t hold a candle to bitcoin’s returns. Although NVDA is getting respectably close.
To TradeSmith Daily readers who haven’t yet bought bitcoin, I’d urge you to look into it. Now that the halving is behind us, history shows it’s a good time to own crypto assets. And with prices consolidating after the last leg higher, I’d say the window to buy is shrinking fast.
Thanks to everyone who wrote in. And to you reading this: If you’re sitting on big gains this year – whether you used TradeSmith’s tools or research to find them or not – we’d love to hear your story. Keep writing in to [email protected] and we’ll look to feature your emails in a future issue.
Now, for something completely different.
❖ The Monday glitch in the NYSE highlights a potential problem with stop losses…
The commotion was hard to miss.
On Monday morning, a pricing glitch at the New York Stock Exchange sent stocks of Barrick Gold (GOLD), Berkshire Hathaway A-shares (BRK.A), Chipotle (CMG), and more down more than 99%.
Images like this started to circulate on X:
What a bargain, right?
Well, if you’d set your “stink bids” on Berkshire A-shares all the way down at $200, chances are the market makers got filled well before you did. And the New York Stock Exchange has promised it would “bust [or reverse] all erroneous trades” that happened during this brief window of extreme losses.
It was a bizarre incident. Some even claim it was calculated, and too isolated to such a select group of stocks to be a true error.
Whether that’s the case or not, it’s a good reminder of how much the market depends on technology – and the institutions keeping that technology running.
And more than that, it made me think about how to manage stop losses.
If you held any of these affected stocks on Monday and had a stop-loss order in place, you might’ve been taken out of the stock at awful prices for no good reason.
Sure, most likely, the NYSE would bust your trades, as it would fall under its Clearly Erroneous Execution (CCE) Rule. But dealing with that loss in the first place would’ve been a major headache at best and potentially destructive to your well-being at worst.
We recommend using stops a lot at TradeSmith. It’s the foundation of our core software, TradeStops. But you should understand that “mental stops” may be a smarter approach than setting true stop-loss orders with your broker, as it puts a degree of separation between your risk point and a trade action.
Our system is ideal for the mental-stops approach because if you have stops selected in our system and get an email alert on one of your holdings, it’s just that – an alert.
TradeSmith’s software doesn’t have the ability to automatically sell your holdings – only your broker can do that. The alert from us is simply a prompt to check your position. And if it’s extreme and unexpected, like what happened with BRK.A, you’ll quickly realize it wasn’t a true stop trigger but rather an anomaly.
Maintain that degree of separation when you’re using stops – it could save you from parting ways with great companies under unusual conditions like these.
❖ Apple’s big AI reveal could come in the next 5 days…
And according to InvestorPlace Senior Analyst Luke Lango, there’s a move you have to make before that happens.
You see, Apple’s Worldwide Developer’s Conference starts on Monday, June 10. During this five-day event, they’re highly expected to announce the major AI product that CEO Tim Cook teased during the company’s January earnings call.
Apple dominates the U.S. smartphone market, not to mention tablets and a respectable market share of laptops and desktops. It’s also been criticized lately for not innovating enough – with some iPhone users holding onto their old phones for longer than they used to as they wait for new features.
But a groundbreaking AI integrated into Apple’s hardware lineup could be a huge boon for the company… not to mention the 1.4 billion existing users of the flagship iPhone as well as new ones.
However… Luke says Apple is not the trade to make ahead of this event.
Instead, he’s got good reason to believe a small-cap AI stock will be the massive beneficiary from this announcement – potentially doubling within days.
He’s sharing an urgent briefing on the situation on Friday, June 7, at 1 p.m. Eastern, and I urge you to attend. Luke will be sharing details on the stock he thinks will catch a huge bid next week, and show you how major Apple news has sent smaller stocks shooting higher in the past.
To your health and wealth,
Michael Salvatore
Editor, TradeSmith